Requirements To claim the foreign earned income exclusion, the foreign housingexclusion, or the foreign housing deduction, you must have foreignearned income, your tax home must be in a foreign country, and youmust be one of the following: A U.S. citizen who is a bona fide resident of a foreigncountry or countries for an uninterrupted period that includes anentire tax year, A U.S. resident alien who is a citizen or national of acountry with which the United States has an income tax treaty ineffect and who is a bona fide resident of a foreign country orcountries for an uninterrupted period that includes an entire taxyear, or A U.S. citizen or a U.S. resident alien who is physicallypresent in a foreign country or countries for at least 330 full daysduring any period of 12 consecutive months. See Publication 519to find out if you qualify as a U.S. residentalien for tax purposes and whether you keep that alien status when youtemporarily work abroad. If you are a nonresident alien married to a U.S. citizen orresident, and both you and your spouse choose to treat you as aresident, you are a resident alien for tax purposes. For informationon making the choice, see the discussion in chapter 1underNonresident Spouse Treated as a Resident. Waiver of minimum time requirements.The minimum time requirements for bona fide residence and physicalpresence can be waived if you must leave a foreign country because ofwar, civil unrest, or similar adverse conditions in that country. SeeWaiver of Time Requirements, later. Figure 4-A Can I Claim the Exclusion Deduction? Tax Homein Foreign Country To qualify for the foreign earned income exclusion, the foreignhousing exclusion, or the foreign housing deduction, your tax homemust be in a foreign country throughout your period of bona fideresidence or physical presence abroad. Bona fide residence andphysical presence are explained later. Tax Home Your tax home is the general area of your main place of business,employment, or post of duty, regardless of where you maintain yourfamily home. Your tax home is the place where you are permanently orindefinitely engaged to work as an employee or self-employedindividual. Having a "tax home" in a given location does notnecessarily mean that the given location is your residence or domicilefor tax purposes. If you do not have a regular or main place of business because ofthe nature of your work, your tax home may be the place where youregularly live. If you have neither a regular or main place ofbusiness nor a place where you regularly live, you are considered anitinerant and your tax home is wherever you work. You are not considered to have a tax home in a foreign country forany period in which your abode is in the United States. However, yourabode is not necessarily in the United States while you aretemporarily in the United States. Your abode is also not necessarilyin the United States merely because you maintain a dwelling in theUnited States, whether or not your spouse or dependents use thedwelling. "Abode" has been variously defined as one's home, habitation,residence, domicile, or place of dwelling. It does not mean yourprincipal place of business. "Abode" has a domestic rather than avocational meaning and does not mean the same as "tax home." Thelocation of your abode often will depend on where you maintain youreconomic, family, and personal ties. Example 1.You are employed on an offshore oil rig in the territorial watersof a foreign country and work a 28-day on/28-day off schedule. Youreturn to your family residence in the United States during your offperiods. You are considered to have an abode in the United States anddo not satisfy the tax home test in the foreign country. You cannotclaim either of the exclusions or the housing deduction. Example 2.For several years, you were a marketing executive with a producerof machine tools in Toledo, Ohio. In November of last year youremployer transferred you to London, England, for a minimum of 18months to set up a sales operation for Europe. Before you left, youdistributed business cards showing your business and home addresses inLondon. You kept ownership of your home in Toledo but rented it toanother family. You placed your car in storage. In November of lastyear, you moved your spouse, children, furniture, and family pets to ahome your employer rented for you in London. Shortly after moving, you leased a car, and you and your spouse gotBritish driving licenses. Your entire family got library cards for thelocal public library. You and your spouse opened bank accounts with aLondon bank and secured consumer credit. You joined a local businessleague, and both you and your spouse became active in the neighborhoodcivic association and worked with a local charity. Your abode is inLondon for the time you live there, and you satisfy the tax home testin the foreign country. Temporary or Indefinite Assignment The location of your taxhome often depends on whether your assignment is temporary orindefinite. If you are temporarily absent from your tax home in theUnited States on business, you may be able to deduct youraway-from-home expenses (for travel, meals, and lodging) but you wouldnot qualify for the foreign earned income exclusion. If your new workassignment is for an indefinite period, your new place of employmentbecomes your tax home, and you would not be able to deduct any of therelated expenses that you have in the general area of this new workassignment. If your new tax home is in a foreign country and you meetthe other requirements, your earnings may qualify for the foreignearned income exclusion. If you expect your employment away from home in a single locationto last, and it does last, for 1 year or less, it is temporary unlessfacts and circumstances indicate otherwise. If you expect it to lastfor more than 1 year, it is indefinite. If you expect it to last for 1year or less, but at some later date you expect it to last longer than1 year, it is temporary (in the absence of facts and circumstancesindicating otherwise) until your expectation changes. Foreign Country To meet the bona fide residence test or the physical presence test,you must live in or be present in a foreign country. A foreign countryusually is any territory (including the air space and territorialwaters) under the sovereignty of a government other than that of theUnited States. The term "foreign country" includes the seabed and subsoil ofthose submarine areas adjacent to the territorial waters of a foreigncountry and over which the foreign country has exclusive rights underinternational law to explore and exploit the natural resources. The term "foreign country" does not include PuertoRico, Guam, the Commonwealth of the Northern Mariana Islands, theVirgin Islands, or U.S. possessions such as American Samoa. Forpurposes of the foreign earned income exclusion, the foreign housingexclusion, and the foreign housing deduction, the terms"foreign,""abroad," and "overseas" refer to areasoutside the United States, American Samoa, Guam, the Commonwealth ofthe Northern Mariana Islands, Puerto Rico, the Virgin Islands, and theAntarctic region. American Samoa,Guam, and theCommonwealth of theNorthern Mariana Islands Residence or presence in a U.S. possessiondoesnotMoravske Toplice recensioni sugli alberghi qualify you for the foreign earned income exclusion.You may, however, qualify for the possession exclusion. American Samoa.There is a possession exclusion available to individuals who arebona fide residents of American Samoa for the entire tax year. Grossincome from sources within American Samoa, Guam, or the Commonwealthof the Northern Mariana Islands may be eligible for this exclusion.Income that is effectively connected with the conduct of a trade orbusiness within those possessions also may be eligible for thisexclusion. Use Form4563, Exclusion of Income for BonaFide Residents of American Samoa, to figure the exclusion. Guam and the Commonwealth of the Northern Mariana Islands.New exclusion rules will apply to residents of Guam and theCommonwealth of the Northern Mariana Islands if, and when, newimplementation agreements take effect between the United States andthose possessions. For more information, see Publication 570. Puerto Ricoand Virgin Islands Residents of Puerto Rico and the Virgin Islands are not entitled tothe possession exclusion (discussed above) or to the exclusion offoreign earned income or the exclusion or deduction of foreign housingamounts under the bona fide residence or physical presence rulesdiscussed later. Puerto Rico.Generally, if you area U.S. citizen who is a bona fide resident of Puerto Rico for theentire tax year, you are not subject to U.S. tax on income from PuertoRican sources. This does not include amounts paid for servicesperformed as an employee of the United States. However, you aresubject to U.S. tax on your income from sources outside Puerto Rico.You cannot deduct expenses allocable to the exempt income. Bona Fide Residence Test The bona fide residence test applies to U.S. citizens and to anyU.S. resident alien who is a citizen or national of a country withwhich the United States has an income tax treaty in effect. Bona fide residence.To see if you meet the test of bona fide residence in a foreigncountry, you must find out if you have established such a residence. Your bona fide residence is not necessarily the same as yourdomicile. Your domicile is your permanent home, the place to which youalways return or intend to return. Example.You could have your domicile in Cleveland, Ohio, and a bona fideresidence in London if you intend to return eventually to Cleveland. The fact that you go to London does not automatically make Londonyour bona fide residence. If you go there as a tourist, or on a shortbusiness trip, and return to the United States, you have notestablished bona fide residence in London. But if you go to London towork for an indefinite or extended period and you set up permanentquarters there for yourself and your family, you probably haveestablished a bona fide residence in a foreign country, even thoughyou intend to return eventually to the United States. You are clearly a transient in the first instance. However, in thesecond, you are a resident because your stay in London appears to bepermanent. If your residency is not as clearly defined as either ofthese illustrations, it may be more difficult to decide whether youhave established a bona fide residence. Determination.Questions of bona fide residence are determined according to eachindividual case, taking into account such factors as your intention orthe purpose of your trip and the nature and length of your stayabroad. You must show the Internal Revenue Service (IRS) that you have beena bona fide resident of a foreign country or countries for anuninterrupted period that includes an entire tax year. The IRS decideswhether you qualify as a bona fide resident of a foreign countrylargely on the basis of facts you report on Form 2555.File this form with your income taxreturn on which you claim the exclusion of foreign earned income. IRScannot make this determination until you file Form 2555. Statement to foreign authorities.You are not considered a bona fide resident of a foreign country ifyou make a statement to the authorities of that country that you arenot a resident of that country and the authorities hold that you arenot subject to their income tax laws as a resident. If you have made such a statement and the authorities have not madea final decision on your status, you are not considered to be a bonafide resident of that foreign country. Special agreements and treaties.The incometax exemption provided in a treaty or other international agreementwill not in itself prevent you from being a bona fide resident of aforeign country. Whether a treaty prevents you from becoming a bonafide resident of a foreign country is determined under all provisionsof the treaty, including specific provisions relating to residence orprivileges and immunities. Example 1.You are a U.S. citizen employed in the United Kingdom by a U.S.employer under contract with the U.S. Armed Forces. You do not qualifyfor special status under the North Atlantic Treaty Status of ForcesAgreement. You are subject to United Kingdom income taxes and mayqualify as a bona fide resident. Example 2.You are a U.S. citizen in the United Kingdom who qualifies as an"employee" of an armed service or as a member of a "civiliancomponent" under the North Atlantic Treaty Status of ForcesAgreement. You do not qualify as a bona fide resident. Example 3.You are a U.S. citizen employed in Japan by a U.S. employer undercontract with the U.S. Armed Forces. You are subject to the agreementof the Treaty of Mutual Cooperation and Security between the UnitedStates and Japan. You do not qualify as a bona fideresident. Example 4.You are a U.S. citizen employed as an "official" by the UnitedNations in Switzerland. You are exempt from Swiss taxation on thesalary or wages paid to you by the United Nations. This does notprevent you from qualifying as a bona fide resident if you meetall the requirements for that status. Effect of voting by absentee ballot.If you are a U.S.citizen living abroad, you can vote by absentee ballot in anyelections held in the United States without risking your status as abona fide resident of a foreign country. However, if you give information to the local election officialsabout the nature and length of your stay abroad that does not matchthe information you give for the bona fide residence test, theinformation given in connection with absentee voting will beconsidered in determining your status, but will not necessarily beconclusive. Uninterrupted period including entire tax year.To qualify for bona fide residence, you must reside in a foreigncountry for an uninterrupted period that includes an entire tax year.An entire tax year is from January 1 through December 31 for taxpayerswho file their income tax returns on a calendar year basis. During the period of bona fide residence in a foreign country, youcan leave the country for brief or temporary trips back to the UnitedStates or elsewhere for vacation or business. To keep your status as abona fide resident of a foreign country, you must have a clearintention of returning from such trips, without unreasonable delay, toyour foreign residence or to a new bona fide residence in anotherforeign country. Example 1.You are the Lisbon representative of a U.S. employer. You arrivedwith your family in Lisbon on November 1, 1997. Your assignment isindefinite, and you intend to live there with your family until yourcompany sends you to a new post. You immediately established residencethere. On April 1, 1998, you arrived in the United States to meet withyour employer, leaving your family in Lisbon. You returned to Lisbonon May 1, and continue living there. On January 1, 1999, you completedan uninterrupted period of residence for a full tax year (1998), andyou may qualify as a bona fide resident of a foreign country. Example 2.Assume that in Example 1, you transferred back to the United Stateson December 13, 1998. You would not qualify under the bona fideresidence test because your bona fide residence in the foreigncountry, although it lasted more than a year, did not include a fulltax year. You may, however, qualify for the foreign earned incomeexclusion or the housing exclusion or deduction under the physicalpresence test discussed later. Bona fide residence status not automatic.You do not automatically acquire bona fide resident status merelyby living in a foreign country or countries for 1 year. Example.If you go to a foreign country to work on a particular constructionjob for a specified period of time, you ordinarily will not beregarded as a bona fide resident of that country even though you workthere for one tax year or longer. The length of your stay and thenature of your job are only some of the factors to be considered indetermining whether you meet the bona fide residence test. Bona fide resident for part of a year.Once you have established bona fide residence in a foreign countryfor an uninterrupted period that includes an entire tax year, you willqualify as a bona fide resident for the period starting with the dateyou actually began the residence and ending with the date you abandonthe foreign residence. You could qualify as a bona fide resident foran entire tax year plus parts of 1 or 2 other tax years. Example.You were a bona fide resident of England from March 1, 1997,through September 14, 1999. On September 15, 1999, you returned to theUnited States. Since you were a bona fide resident of a foreigncountry for all of 1998, you also qualify as a bona fide resident fromMarch 1, 1997, through the end of 1997 and from January 1, 1999,through September 14, 1999. Reassignment.If you are assigned from one foreign post to another, you may ormay not have a break in foreign residence between your assignments,depending on the circumstances. Example 1.You were a resident of France from October 1, 1998, throughNovember 30, 1999. On December 1, 1999, you and your family returnedto the United States to wait for an assignment to another foreigncountry. Your household goods also were returned to the United States. cheap hotel in LyonYour foreign residence ended on November 30, 1999, and did notbegin again until after you were assigned to another foreign countryand physically entered that country. Since you were not a bona fideresident of a foreign country for the entire tax year of 1998 or 1999,you do not qualify under the bona fide residence test in either year.You may, however, qualify for the foreign earned income exclusion orthe housing exclusion or deduction under the physical presence test,discussed later. Example 2.Assume the same facts as in Example 1, except that upon completionof your assignment in France you were given a new assignment toEngland. On December 1, 1999, you and your family returned to theUnited States for a month's vacation. On January 2, 2000, you arrivedin England for your new assignment. Because you did not interrupt yourbona fide residence abroad, you qualify at the end of 1999 as a bonafide resident of a foreign country. Physical Presence Test You meet the physical presence test if you are physically presentin a foreign country or countries 330 full days during a period of 12consecutive months. The 330 qualifying days do not have to beconsecutive. The physical presence test applies to both U.S. citizensand resident aliens. The physical presence test is concerned only with how long you stayin a foreign country or countries. This test does not depend on thekind of residence you establish, your intentions about returning, orthe nature and purpose of your stay abroad. However, your intentionswith regard to the nature and purpose of your stay abroad are relevantin determining whether you meet the tax home test explained earlierunder Tax Home in Foreign Country. 12-month period.Your 12-month period can begin with any day of any calendar month.It ends the day before the same calendar day, 12 months later. Example. Your flight touches down in London on June 13, 1999. Your 12-monthperiod ends on June 12, 2000. Purpose of stay.You do not have to be in a foreign country only for employmentpurposes. You can be on vacation time. Less than 330 full days.Generally, to meet the physical presence test, you must bephysically present in a foreign country or countries for at least 330full days during the 12-month period. This means that if illness,family problems, a vacation, or your employer's orders cause you to bepresent for less than the required amount of time, you cannot meet thephysical presence test. Exception.You can be physically present in a foreign country or countries forless than 330 full days and still meet the physical presence test ifyou are required to leave a country because of war or civil unrest.See Waiver of Time Requirements, later. Full day.A full day is a period of 24consecutive hours, beginning at midnight. You must spend each of the330 full days in a foreign country. When you leave the United Statesto go directly to a foreign country or when you return directly to theUnited States from a foreign country, the time you spend on or overinternational waters does not count toward the 330-day total. Example.You leave the United States for France by air on June 10. Youarrive in France at 9:00 a.m. on June 11. Your first full day inFrance is June 12. Passing over foreign country.If, in traveling from the United States to a foreign country, youpass over a foreign country before midnight of the day you leave, thefirst day you can count toward the 330-day total is the day followingthe day you leave the United States. Example.You leave the United States by air at 9:30 a.m. on June 10 totravel to Spain. You pass over a part of France at 11:00 p.m. on June10 and arrive in Spain at 12:30 a.m. on June 11. Your first full dayin a foreign country is June 11. Foreign move.You can move about from one place to another in a foreign countryor to another foreign country without losing full days. But if anypart of your travel is not within a foreign country or countries andtakes 24 hours or more, you will lose full days. Example 1.You leave London by air at 11:00 p.m. on July 6 and arrive inStockholm at 5:00 a.m. on July 7. Your trip takes less than 24 hoursand you lose no full days. Example 2.You leave Norway by ship at 10:00 p.m. on July 6 and arrive inPortugal at 6:00 a.m. on July 8. Since your travel is not within aforeign country or countries and the trip takes more than 24 hours,you lose as full days July 6, 7, and 8. If you remain in Portugal,your next full day in a foreign country is July 9. In U.S. while in transit.If you are in transit between two points outside the United Statesand are physically present in the United States for less than 24hours, you are not treated as present in the United States during thetransit. You are treated as traveling over areas not within anyforeign country. How to figure the 12-month period.There are four rulesyou should know when figuring the 12-month period. Your 12-month period can begin with any day of the month. Itends the day before the same calendar day, 12 months later. Your 12-month period must be made up of consecutive months.Any 12-month period can be used if the 330 days in aforeign country fall within that period. You do not have to begin your 12-month period with yourfirst full day in a foreign country or to end it with the day youleave. You can choose the 12-month period that gives you the greatestexclusion. In determining if the 12-month period falls within a longerstay in the foreign country, any 12-month period canoverlap another. Example 1.You are a construction worker who works on and off in a foreigncountry over a 20-month period. You might pick up the 330 full days ina 12-month period only during the middle months of the time you workin the foreign country because the first few and last few months ofthe 20-month period are broken up by long visits to the United States. Example 2.You work in Canada for a 20-month period from January 1, 1998,through August 31, 1999, except that you spend February 1998 andFebruary 1999 on vacation in the United States. You are present inCanada 330 full days during each of the following two 12-monthperiods. One 12-month period can begin January 1, 1998, and endDecember 31, 1998; the second period can begin September 1, 1998, andend August 31, 1999. By overlapping the 12-month periods in this way,you meet the physical presence test for the whole 20-month period. SeeTable 4-1. Table 4-1 Exceptions to Tests There are two exceptions to meeting the requirements under the bonafide residence and the physical presence tests. Waiver of Time Requirements Both the bona fide residence test and the physical presence testcontain minimum time requirements. The minimum time requirements canbe waived, however, if you must leave a foreign country because ofwar, civil unrest, or similar adverse conditions in thatcountry. You also must be able to show that you reasonably could haveexpected to meet the minimum time requirements if not for the adverseconditions. To qualify for the waiver, you must actually have your taxhome in the foreign country and be a bona fide resident of, or bephysically present in, the foreign country on or before the beginningdate of the waiver. Early in 2000, the IRS will publish in the Internal RevenueBulletin a list of countries qualifying for the waiver for 1999 andthe effective dates. If you left one of the countries on or after thedate listed for each country, you can qualify for the bona fideresidence test or physical presence test for 1999 without meeting theminimum time requirement. However, in figuring your exclusion, thenumber of your qualifying days of bona fide residence or physicalpresence includes only days of actual residence or presence within thecountry. You can read the Internal Revenue Bulletins on the Internet atwww.irs.gov. Select Tax Info For You. Or, youcan get a copy of the list of countries by writing to: Internal Revenue Service Assistant Commissioner (International) Attention: OP:IN:D:CS 950 L'Enfant Plaza South, SW Washington, DC 20024 U.S. Travel Restrictions If you are present in a foreign country in violation of U.S. law,you will not be treated as a bona fide resident of a foreign countryor as physically present in a foreign country while you are inviolation of the law. Income that you earn from sources within such acountry for services performed during a period of violation does notqualify as foreign earned income. Your housing expenses within thatcountry (or outside that country for housing your spouse ordependents) while you are in violation of the law cannot be includedin figuring your foreign housing amount. Currently, the countries to which travel restrictions apply and thebeginning dates of the restrictions are as follows: Cuba -- January 1, 1987 Iraq -- August 2, 1990 Libya -- January 1, 1987 The restrictions are still in effect in all three countries. Foreign Earned Income The foreign earned income exclusion, the foreign housing exclusion,and the foreign housing deduction are based on foreign earned income.For this purpose, foreign earned income is income you receive forservices you perform in a foreign country during a period your taxhome is in a foreign country and during which you meet either the bonafide residence test or the physical presence test, discussed earlier. Foreign earned income does not include the following amounts. The previously excluded value of meals and lodging furnishedfor the convenience of your employer. Pension or annuity payments including social securitybenefits (see Pensions and annuities, later). U.S. Government payments to its employees (see U.S.Government Employees, later). Amounts included in your income because of your employer'scontributions to a nonexempt employee trust or to a nonqualifiedannuity contract. Recaptured unallowable moving expenses (see MovingExpenses in chapter 5). Payments received after the end of the tax year followingthe tax year in which you performed the services that earned theincome. Earned income ispay for personalservices performed, such as wages, salaries, or professionalfees. The list that follows classifies many types of income into threecategories. The column headed Variable Income lists incomethat may fall into either the earned income category, the unearnedincome category, or partly into both.For more information on earned andunearned income, see Earned and Unearned Income, later. Unearned Variable Earned Income Income Income Salaries and Dividends Business  wages Interest  profits Commissions Capital gains Royalties Bonuses Gambling Rents Professional fees  winnings Tips Alimony Social security  benefits Pensions Annuities In addition to the types of earned income listed, certain noncashincome and allowances or reimbursements are considered earned income.They must be included in the listing of earned income on Form 2555. Noncash income.The fair market value of property or facilities provided to you byyour employer in the form of lodging, meals, or use of a car is earnedincome. Allowances or reimbursements.Earned income includes amounts paid to you as allowances orreimbursements for the following items. Cost of living. Overseas differential. Family. Education. Home leave. Quarters. Moving (unless excluded from income as discussedlater). Source of Earned Income The source of your earned income is the place where you perform theservices for which you received the income. Foreign earned income isincome you receive for performing personal services in a foreigncountry. Where or how you are paid has no effect on the source of theincome. For example, income you receive for work done in France isincome from a foreign source even if the income is paid directly toyour bank account in the United States and your employer is located inNew York City. If you receive a specific amount for work done in the UnitedStates, you must report that amount as U.S. source income. If youcannot determine how much is for work done in the United States, orfor work done partly in the United States and partly in a foreigncountry, determine the amount of U.S. source income using the methodthat most correctly shows the proper source of your income. In most cases you can make this determination on a time basis. U.S.source income is the amount that results from multiplying your totalpay (including allowances, reimbursements other than for foreignmoves, and noncash fringe benefits) by a fraction. The numerator (topnumber) is the number of days you worked within the United States. Thedenominator (bottom number) is the total number of days of work forwhich you were paid. Example.You are a U.S. citizen, a bona fide resident of Country A, andworking as a mining engineer. Your salary is $76,800 per year. Youalso receive a $6,000 cost of living allowance, and a $6,000 educationallowance. Your employment contract did not indicate that you wereentitled to these allowances only while outside the United States.Your total pay is $88,800. You work a 5-day week, Monday throughFriday. After subtracting your vacation, you have a total of 240workdays in the year. You worked in the United States during the yearfor 6 weeks (30 workdays). The following shows how to figure yourwages paid for work done in the United States during the year. Number of days worked in the United States during the year (30) Number of days of work during the year for which payment wasmade (240) Total pay ($88,800) = $11,100. Your U.S. source income is $11,100. Earned andUnearned Income Earned income was defined earlier as pay for personal servicesperformed. Some types of income are not easily identified as earned orunearned income. These types of income --specifically, incomefrom sole proprietor-ships, partnerships, and corporations, stockoptions, pensions and annuities, royalties, rents, and fringebenefits--are further explained here. Income from soleproprietor-ships and partnerships generally is treated one way, andincome from corporations is treated another way. Trade or business--sole proprietorship or partnership. Generally, income from abusiness in which capital investment is an important part of producingthe income is unearned income. However, if you are a sole proprietoror partner and your personal services are also an important part ofproducing the income, part of the income will be treated as your pay(earned income). The amount treated as your pay cannot be more than the smaller of: The value of your personal services to the business,or If there are net profits, 30% of your share of the netprofits of the business. Example 1.You are a U.S. citizen and meet the bona fide residence test. Youinvest in a partnership based in Italy that is engaged solely inselling merchandise outside the United States. You perform no servicesfor the partnership. At the end of the tax year, your share of the netprofits is $80,000. The entire $80,000 is unearned income. Example 2.Assume that in Example 1 you spend time operating the business.Your share of the net profits is $80,000, 30% of your share of theprofits is $24,000. If the value of your services for the year is$15,000, your earned income is limited to the value of your services,$15,000. No net profits.If you have no net profits, the part of your gross profit thatrepresents a reasonable allowance for personal services actuallyperformed is considered earned income. Because you do not have a netprofit, the 30% limit does not apply. If capital is notan income-producing factor and personal services produce thebusiness income, the 30% rule does not apply. The entire amount ofbusiness income is earned income. Example.You and Lou Green are management consultants and operate as equalpartners in performing services outside the United States. Becausecapital is not an income-producing factor, all the income from thepartnership is considered earned income. Trade or business--corporation.Income from a corporation is not treated the same as income from asole proprietorship or partnership. The salary you receive from acorporation is earned income only if it represents a reasonableallowance as compensation for work you do for the corporation. Anyamount over what is considered a reasonable salary is unearned income. Example 1.You are a U.S. citizen and an officer and stockholder of acorporation in Canada. You perform no work or service of any kind forthe corporation. During the tax year you receive a $10,000 "salary"from the corporation. The $10,000 clearly is not for personal servicesand is unearned income. Example 2.You are a U.S. citizen and devote full time as secretary-treasurerof your corporation. During the tax year you receive $100,000 assalary from the corporation. If $80,000 is a reasonable allowance aspay for the work you did, then $80,000 is earned income. Stock options.You may have earned income ifyou disposed of stock that you got by exercising a stock optiongranted to you under an employee stock purchase plan. If your gain on the disposition of option stock is treated ascapital gain, your gain is unearned income. However, if you disposed of the stock less than 2 years after youwere granted the option or less than 1 year after you got the stock,part of the gain on the disposition may be earned income. It isconsidered received in the year you disposed of the stock and earnedin the year you performed the services for which you were granted theoption. Any part of the earned income that is due to work you didoutside the United States is foreign earned income. See Publication 525, Taxable and Nontaxable Income, fora discussion of treatment of stock options. Pensions and annuities.For purposes of theforeign earned income exclusion, the foreign housing exclusion, andthe foreign housing deduction, amounts received as pensions orannuities are unearned income. Royalties.Royalties from the leasing of oiland mineral lands and patents generally are a form of rent ordividends and are unearned income. Royalties received by a writer are earned income if theyare received: For the transfer of property rights of the writer in thewriter's product, or Under a contract to write a book or series ofarticles. Rental income.Generally, rental income is unearnedincome. If you perform personal services in connection with theproduction of rent, up to 30% of your net rental income can beconsidered earned income. Example.Larry Smith, a U.S. citizen living in France, owns and operates arooming house in Paris. If he is operating the rooming house as abusiness that requires capital and personal services, he can considerup to 30% of net rental income as earned income. On the other hand, ifhe just owns the rooming house and performs no personal servicesconnected with its operation, except perhaps making minor repairs andcollecting rents, none of his net income from the house is consideredearned income. It is all unearned income. Income of an artist.Income you receive from the sale ofpaintings is earned income if you painted the pictures yourself. Use of employer's property or facilities. If youreceive fringe benefits in the form of the right to use youremployer's property or facilities, you must add the fair market valueof that right to your pay. Fair market value is the priceat which the property would change hands between a willing buyer and awilling seller, neither being required to buy or sell, and both havingreasonable knowledge of all the necessary facts. Example.You are privately employed and live in Japan all year. You are paida salary of $6,000 a month. You live rent-free in a house provided byyour employer that has a fair rental value of $3,000 a month. Thehouse is not provided for your employer's convenience. You report onthe calendar year, cash basis. You received $72,000 salary fromforeign sources plus $36,000 fair rental value of the house, or atotal of $108,000 of earned income. Reimbursement of employee expenses.If youare reimbursed under an accountable plan (defined below) for expensesyou incur on your employer's behalf and you have adequately accountedto your employer for the expenses, do not include the reimbursementfor those expenses in your earned income. The expenses for which you are reimbursed are not consideredallocable (related) to your earned income. If expenses andreimbursement are equal, there is nothing to allocate to excludedincome. If expenses are more than the reimbursement, the unreimbursedexpenses are considered to have been incurred in producing earnedincome and must be divided between your excluded and included incomein determining the amount of unreimbursed expenses you can deduct.(See chapter 5.)If the reimbursement is more than the expenses, noexpenses remain to be divided between excluded and included income andthe excess must be included in earned income. These rules do not apply to straight-commissionsalespersons or other individuals who are employees and havearrangements with their employers under which, for withholding taxpurposes, their employers consider a percentage of the commissions tobe attributable to the expenses of the employees and do not withholdtaxes on that percentage. Accountable plan.An accountable plan is a reimbursement or allowance arrangementthat includes all three of the following rules. The expenses covered under the plan must have a businessconnection. The employee must adequately account to the employer forthese expenses within a reasonable period of time. The employee must return any excess reimbursement orallowance within a reasonable period of time. Reimbursement of moving expenses.Earned income may include reimbursement of moving expenses. Youmust include as earned income: Any reimbursements of, or payments for, nondeductible movingexpenses; Reimbursements that are more than your deductible expensesand that you do not return to your employer; Any reimbursements made (or treated as made) under anonaccountable plan (any plan that does not meet the rules listedabove for an accountable plan), even if they are for deductibleexpenses; and Any reimbursement of moving expenses you deducted in anearlier year. This section discusses reimbursements that must be included inearned income. Publication 521, Moving Expenses, discussesadditional rules that apply to moving expense deductions andreimbursements. The rules for determining when the reimbursement isconsidered earned or where the reimbursement is consideredearned may differ somewhat from the general rules previouslydiscussed. Although you receive the reimbursement in one tax year, it may beconsidered earned for services performed, or to be performed, inanother tax year. You must report the reimbursement asincome on your return in the year you receive it, even if it isconsidered earned during a different year. Move from U.S. to foreign country.If you move from the United States to a foreign country, yourmoving expense reimbursement is considered pay for future services tobe performed at the new location. The reimbursement is consideredearned solely in the year of the move if your tax home is in a foreigncountry and you qualify under the bona fide residence test or physicalpresence test for at least 120 days during that tax year. If you do not qualify under either test for 120 days during theyear of the move, the reimbursement is considered earned in the yearof the move and the year following the year of the move. To figure theamount earned in the year of the move, multiply the reimbursement by afraction. The numerator (top number) is the number of days in yourqualifying period that fall within the year of the move, and thedenominator (bottom number) is the total number of days in the year ofthe move. The difference between the total reimbursement and the amountconsidered earned in the year of the move is the amount consideredearned in the year following the year of the move. The part earned ineach year is figured as shown in the following example. Example.You are a U.S. citizen working in the United States. You were toldin October of last year that you were being transferred to a foreigncountry. You arrived in the foreign country on December 15 of lastyear, and you qualify as a bona fide resident for the remainder oflast year and all of this year. Your employer reimburses you $2,000 inJanuary of this year for the part of the moving expense that you werenot allowed to deduct. Because you did not qualify as a bona fideresident for at least 120 days last year (the year of the move), thereimbursement is considered pay for services performed in the foreigncountry for both last year and this year. You figure the part of the moving expense reimbursement forservices performed in the foreign country last year by multiplying thetotal reimbursement by a fraction. The fraction is the number of daysduring which you were a bona fide resident during the year of the movedivided by 365 (366 if it was a leap year). The remaining part of thereimbursement is for services performed in the foreign country thisyear. This computation is used only to determine when thereimbursement is considered earned. You would report the amount youinclude in income in this tax year, the year you received it. Move between foreign countries.If you move between foreign countries and you qualify for at least120 days during the tax year under the bona fide residence test or thephysical presence test, the moving expense reimbursement that you mustinclude in income is considered earned in the tax year of the move. Move to U.S.If you move to the United States, the moving expense reimbursementthat you must include in income is generally considered to be U.S.source income. However, if under either an agreement between you and your employeror a statement of company policy that is reduced to writing beforeyour move to the foreign country, your employer will reimburse you foryour move back to the United States regardless of whether you continueto work for the employer, the includible reimbursement is consideredcompensation for past services performed in the foreign country. Theincludible reimbursement is considered earned in the tax year of themove if you qualify under the bona fide residence test or the physicalpresence test for at least 120 days during that tax year. Otherwise,you treat the includible reimbursement as received for servicesperformed in the foreign country in the year of the move and the yearimmediately before the year of the move. See the discussion under Move from U.S. to foreign country(earlier) to figure the amount of the includible reimbursementconsidered earned in the year of the move. The amount earned in theyear before the year of the move is the difference between the totalincludible reimbursement and the amount earned in the year of themove. Example.You are a U.S. citizen employed in a foreign country. You retiredfrom employment with your employer on March 31 of last year, andreturned to the United States after having been a bona fide residentof the foreign country for several years. A written agreement withyour employer entered into before you went abroad provided that youwould be reimbursed for your move back to the United States. In April of last year, your former employer reimbursed you $2,000for the part of the cost of your move back to the United States thatyou were not allowed to deduct. Because you were not a bona fideresident for at least 120 days last year (the year of the move), theincludible reimbursement is considered pay for services performed inthe foreign country for both last year and the year before last. You figure the part of the moving expense reimbursement forservices performed in the foreign country last year by multiplying thetotal includible reimbursement by a fraction. The fraction is thenumber of days of foreign residence during the year (90) divided bythe number of days in the year (365 or 366). The remaining part of theincludible reimbursement is for services performed in the foreigncountry the year before last. You report the amount of the includiblereimbursement on your Form 1040 for last year, the tax year youreceived it. TaxTip: In this example, if you qualify to exclude income under thephysical presence test instead of the bona fide residence test forlast year, you may have had more than 120 qualifying days in the yearof the move because you can choose the 12-month qualifying period thatis most advantageous to you. (See Physical presence test,later under Part-year exclusion.) If so, the movingexpense reimbursement would be considered earned entirely in the yearof the move (last year). Storage expense reimbursements.If you are reimbursed for storage expenses, the reimbursement isfor services you perform during the period you are in the foreigncountry. U.S. Government Employees For purposes of the foreign earned income exclusion and the foreignhousing exclusion or deduction, foreign earned income does not includeany amounts paid by the United States or any of its agencies to itsemployees. Payments to employees of nonappropriated fund activitiesare not foreign earned income. Nonappropriated fund activities includethe following employers. Armed forces post exchanges. Officers' and enlisted personnel clubs. Post and station theaters. Embassy commissaries. Amounts paid by the United States or its agencies to persons whoare not their employees may qualify for exclusion ordeduction. If you are a U.S. Government employee paid by a U.S. agency thatassigned you to a foreign government to perform specific services forwhich the agency is reimbursed by the foreign government, your pay isfrom the U.S. Government and does not qualify for the exclusion ordeduction. If you have questions about whether you are an employee or anindependent contractor, get Publication 15-A,Employer'sSupplemental Tax Guide. Panama Canal Commission.U.S. employees of the Panama Canal Commissionareemployees of a U.S. Government agency and are not eligible for theforeign earned income exclusion on their salaries from that source.Furthermore, no provision of the Panama Canal Treaty or Agreementexempts their income from U.S. taxation. Employees of the Panama CanalCommission and civilian employees of the Defense Department of theUnited States stationed in Panama can exclude certain foreign-area andcost-of-living allowances. See Publication 516, U.S. GovernmentCivilian Employees Stationed Abroad, for more information. These employees cannot exclude any overseas tropical differentialthey receive. American Institute in Taiwan.Amounts paid by the American Institute in Taiwan are not consideredforeign earned income for purposes of the exclusion of foreign earnedincome or the exclusion or deduction of foreign housing amounts. Ifyou are an employee of the American Institute in Taiwan, allowancesyou receive are exempt from U.S. tax up to the amount that equalstax-exempt allowances received by civilian employees of the U.S.Government. Allowances.Cost-of-living and foreign-area allowances paid under certain Actsof Congress to U.S. civilian officers and employees stationed inAlaska and Hawaii or elsewhere outside the 48 contiguous states andthe District of Columbia can be excluded from gross income. SeePublication 516 for more information. Post differentials are wagesthat must be included in gross income, regardless of the Act ofCongress under which they are paid. Exclusion ofMeals and Lodging You do not include in your income the value of meals and lodgingprovided to you and your family by your employer at no charge if thefollowing conditions are met. The meals are: Furnished on the business premises of your employer,and Furnished for the convenience of your employer. The lodging is: Furnished on the business premises of your employer, Furnished for the convenience of your employer, and A condition of your employment. (You are required to acceptit). Amounts you do not include in income because of these rules arenot foreign earned income. Family.Your family, for this purpose, includes only your spouse and yourdependents. Lodging.The value of lodging includes the cost of heat, electricity, gas,water, sewer service, and similar items needed to make the lodging fitto live in. Business premises of employer.Generally, the business premises of your employer are wherever youwork. For example, if you work as a housekeeper, meals and lodgingprovided in your employer's home are provided on the business premisesof your employer. Similarly, meals provided to cowhands while herdingcattle on land leased or owned by their employer are consideredprovided on the premises of their employer. Convenience of employer.Whether meals or lodging are provided for your employer'sconvenience must be determined from all the facts. Meals or lodgingprovided to you and your family by your employer will be consideredprovided for your employer's convenience if there is a good businessreason for providing the meals or lodging, other than to give you morepay. If your employer has a good business reason for providing the mealsor lodging, do not include their value in your income, even thoughyour employer may also intend them as part of your pay. You canexclude the value of meals or lodging from your income even if a lawor your employment contract says that they are provided ascompensation. On the other hand, if meals or lodging are provided to you or yourfamily by your employer as a means of giving you more pay, and thereis no other business reason for providing them, their value is extraincome to you. Condition of employment.Lodging is provided as a condition of employment if you must acceptthe lodging to properly carry out the duties of your job. You mustaccept lodging to properly carry out your duties if, for example, youmust be available for duty at all times. Foreign camps.If you are provided lodging by or for your employer in a camplocated in a foreign country, the camp is considered to be part ofyour employer's business premises. For this purpose, a camp is lodgingthat is: Provided for your employer's convenience because the placewhere you work is in a remote area where satisfactory housing is notavailable to you on the open market within a reasonable commutingdistance, Located as close as reasonably possible in the area whereyou render services, and Provided in a common area or enclave that is not availableto the general public for lodging or accommodations and that normallyhouses at least ten employees.